China’s Comprehensive 4-Point Plan to Rescue the Economy

China Unveils New Stimulus Package Amid Economic Concerns

In a surprising move to address the escalating economic crisis and bolster confidence in its recovery, China has introduced a comprehensive stimulus package.
The central bank has rolled out substantial monetary easing and measures aimed at supporting the troubled real estate market, as the economy grapples with severe deflationary pressures and risks missing its growth target for this year.

This broader-than-expected package signifies the Chinese officials’ latest efforts to restore faith in the world’s second-largest economy, following a string of disappointing data in recent months.
The markets responded positively, with Hong Kong and Chinese stocks witnessing a rise, while yields on 10-year Chinese bonds fell to historic lows of 2%.
The offshore yuan remained almost stable.

Analysts welcomed this stimulus but cautioned it does not constitute the “bazooka” many deem necessary to reignite consumer spending.
Some observers expressed disappointment over the lack of policies targeting real economic activity, highlighting the waning credit demand among businesses and consumers.
Further fiscal stimulus may be essential to return growth towards the anticipated 5% target for this year.

Key Elements of China’s Latest Relief Plan

So, what does China’s latest plan entail to prevent a prolonged crisis? Here’s a summary in four key points:

1.
Reserve Requirement Ratio Cut

Central bank governor Pan announced a cut of 50 basis points to the reserve requirement ratio (RRR).
While he did not specify when this would take effect, he suggested it would occur in the near term.
Depending on market conditions, an additional cut of 0.25-0.5 basis points could be considered by year-end.
According to Pan, this decision could free up approximately 1 trillion yuan ($142 billion) for new lending.
However, economist Lynn Song commented that this move mainly aims to lift market sentiment, as the real challenge lies in low loan demand rather than a lack of funds.

2.
Benchmark Interest Rate Reduction

The People’s Bank of China (PBOC) will also decrease the seven-day repo rate, its new benchmark, by 20 basis points to 1.5%.
Additionally, the medium-term lending facility rate will see a drop of around 30 basis points, while the primary interest rates on loans will be lowered by 20-25 basis points.
Lynn Song referred to this rate cut as the most significant action taken during the press briefing, emphasizing that the impact will depend on whether there will be further cuts or if the PBOC adopts a wait-and-see approach post-announcement.

3.
Measures to Address the Real Estate Crisis

The stimulus package includes measures for the real estate sector, such as reducing existing mortgage rates by 50 basis points and lowering the minimum down payment requirement to 15% for all types of homes.
The Chinese property market has been in decline since its peak in 2021, with numerous developers facing defaults, resulting in excessive inventories and numerous unfinished projects.
Although Beijing has eased buying restrictions and reduced mortgage rates, these efforts have yet to rekindle demand or stop the rapid fall in housing prices, which plummeted at the most accelerated rate in nearly a decade as of August.

4.
Support for Equities

Lastly, Pan revealed plans for at least 500 billion yuan ($71 billion) in liquidity support for the stock market.
A swap structure will be established, enabling securities firms, funds, and insurance companies to access the PBOC for equity purchases.
Moreover, authorities are considering creating a stock stabilization fund, although no specific details were provided at this time.